Business

REPORT: Audits are largely misunderstood, UCR researcher says

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âInvestors clearly do not believe the current three-paragraph, largely boilerplate, binary audit report is either sufficiently informative or serves their needs,â Harris said.

What everyday investors want could be as simple as a stamp atop that says: âOK,â according to Mockâs report. The same goes for financial officers, bankers, analysts and the auditors themselves, who were all surveyed in focus groups as part of the research.

If investors do glance at the current reports, theyâll look for language assuring them the companyâs financials check out, even if the language itself is vague and misunderstood, the research said. Then theyâll scan it for the name of the auditing firm to see whether itâs one of the recognizable âBig Fourâ tax firms (Ernst & Young, for example) or one they may have never heard of, Mockâs research reported.

WHAT DOES IT MEAN?

In its effort to raise $5 billion in a public stock offering, Facebook Inc. included a financial audit report to accompany its prospectus. In the four-paragraph report, Ernst & Young reported that Facebookâs financial statements âpresent fairly, in all material.â What that means, exactly, isnât something widely understood, Mock pointed out, but it generally means the financial statements adhered to ever-important accounting standards.

The phrase âreasonable assuranceâ is mentioned at least four times in a document shorter than a single page. Itâs an integral phrase, but among the least understood by readers of the statements, Mock said.

While âreasonableâ may elicit a shrug in any other circumstance, in the case of an audit, it could mean the financial statements in the report were deemed highly reliable.

In comments to the accounting oversight boardâs only conceptual talk of improving the standards, numerous auditing firms, investor groups and public companies responded. Most were wary of efforts to expand the auditorâs role much more, citing costs and risk, but few if any had an issue with making the reports easier to read.

âWe support all efforts to clarify the language used in the audit report to ensure investors clearly understand the specific roles and responsibilities of management and auditors,â wrote Apple Inc.âs Betsy Rafael, vice president and corporate controller.

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